John Templeton's Plan for Surviving the Great Recession

Although only a distracted hermit didn't realize this, it is now official that the US economy is in a recession. Even credit card companies are getting cautious about how high our credit lines are and they anticipate a terrible default rate on credit card debt.

So don't be surprised to see your lines of credit reduced in the months ahead, and they can't be good for either consumer spending and consumer confidence. It's enough to make the stock market go into another deep tailspin.

By the way, for those who like to invest in foreign currencies and international income, take a look at the one year chart on the Templeton Global Income fund (NYSE:GIM). It is quite the sight.

This economic mess might take a long time to right itself, but....

While we wait patiently, here's what the late John Templeton [one of the most successful investors of alll times] can teach us...

How to Build Wealth With Risks, Bargains and Tax Deferral

Here is Templeton's five-step formula for financial independence, based on almost a century of experience.

1. Take calculated risks. Templeton started off by taking significant risks in his business and investments. He was a serious poker player in college, and in 1939, he borrowed $10,000 from his boss to bet on 100 stocks listed on the NYSE selling for under a buck. A high percentage of these companies were close to bankruptcy, but Templeton reasoned that they would recover during a wartime economy. (It pays to have a correct "macro" view of the world.) In four years, he sold all the stocks, paid off the debt, and pocketed $40,000 in profit. He was on his way to success.

2. Save, don't spend. Templeton started out poor, but through the principles of thrift and hard work, he was able to get ahead. When he married, he and his wife set a goal of saving 50% of their income. He avoided consumer debt - in fact, he bought his first home with cash. He carried his "cheap" approach into later life. I met Sir John once in the Bahamas in his Rolls Royce, but he was quick to tell me that he bought it used!

He always works hard, putting in 60 hours a week. He would agree with J. Paul Getty, whose motto was, "Make your money first... then think about spending it."

3. Shop for value investments. Templeton follows the fundamental "bargain-hunting" approach to investing. "The long-range view requires patience." His Templeton Growth Fund, which he ran for 50 years before turning it over to the Franklin Group, held stocks for an average six to seven years. He always searched for companies around the world that offered low prices and an excellent long-term outlook. "It's not easy," he states, "but if you're going to buy the best bargains, look in more than one industry, and look in more than one nation."

Under Templeton's managing skills, the Templeton Growth Fund averaged a 14% annualized return over 50 years, far outperforming the stock market indexes.

Templeton rejects the "technical" method of trading stocks. "You must be a fundamentalist to be really successful in the market," he says. I agree. The best technicians make the most profitable trades in companies with sound fundamentals in sales and earnings.

4. Take advantage of international free markets. Templeton believes a "free enterprise" approach is mandatory when investing overseas. "Avoid investing in those countries with a high level of socialism or government regulation of business," he says. "Business growth depends on a strong free-enterprise system." He told me that he is a follower of free-market economists Ludwig von Mises, Friedrich Hayek and Milton Friedman. "Governments should stop interfering with what people want to do."

Templeton took a 'round-the-world tour in 1936, and he was stuck by the poverty in India and Hong Kong. When he returned 40 years later, he noted a sharp contrast. "The standard of living in Hong Kong has multiplied more than tenfold in 40 years," he said, "while the standard of living in Calcutta has improved hardly at all. The major difference is between free enterprise and socialism. The Indian government regulates nearly everything, so there's very little progress; whereas in Hong Kong, the government keeps its hands off."

Note: Since Templeton wrote this in 1976, things are changing rapidly. India, for example, is finally pursuing market-friendly policies.

5. Minimize your taxes. In the 1960s, Templeton made a controversial decision. He decided to renounce his U.S. citizenship and move to the Bahamas, where there is no income tax or investment tax. He became a British citizen, and now a Bahamian citizen, and lives tax-free (the Bahamas gets its revenue from high import duties and corporate/trust fees).

Interestingly, his investment record improved markedly after he stopped worrying about the tax consequences of his investment decisions. As a result of tax-free compounding, Templetonwas worth several billion dollars when he passed away last year, and was one of the wealthiest men alive.

However, Templeton did not recommend that American investors follow his lead and switch allegiance to a tax haven such as the Bahamas (it's almost impossible for an American to become a Bahamian citizen today). But, Templeton strongly recommended that you should take full advantage of tax-deferral vehicles such as a corporate pension plan or an IRA, and incorporate your business.

Templeton knew that the best investment opportunities always look like the worst and smell horrible. The news media is extra-negative during those times and the market seems stock in reverse. Only after the the most die-hard investors throw in the towel and sell does the market specialists and "smart money" folks begin to buy hand over fist.

That might not be too far off. In the meantime, start making your "wish list" with great companies like BHP Billiton (NYSE:BHP), Freeport-McMoran (NYSE:FCX), NYSE Euronext (NYSE:NYX), Microsoft (NYSE:MSFT), Wal-Mart (NYSE:WMT) and Bunge Limited (NYSE:BG). And save every dollar you can for the "sale of the century" which might have only just begun.

Disclosure: Author holds a long position in FCX

Comments

[NOWHEREMAN:]

John Templeton died just before the current entry into the Abyss began. You are making the assumption that he would have reacted the way you are. What makes you believe you can predict which stocks he would have considered to be suitable?

BTW, he made his mark by buying 100 shares of every stock trading below $1.00 in 1939.

Fundamental analysis combined with a sense of true value, I can wait for the annual lows list to be published by Barron's for the first 2 weeks of December before venturing into the risky world of Falling Knives. IMHO

2008 Dec 02 09:19 AM

[VennData:]

I question the reasoning and significance to make such hay out of someone who renounced his US citizenship. It's not something that appeals to the vast majority of Americans who are incredibly patriotic and proud of our country. And for what? ...to make another few million when he's got billions?

Another right wing, Misean-Friedmanite who left the cost and sacrifice of protecting our values and maintaining the leadership of the free world to others.

2008 Dec 02 09:51 AM

[MEDICINE MAN:]

COMPLETE AGREEMENT! HAPPIEST PEOPLE I HAVE EVER KNOWN ARE MIDDLE SOCIOECONOMIC STRATA WHO WORK HARD AND ARE GENEROUS WITH THEIR TIME.


On Dec 02 09:51 AM VennData wrote:

> I question the reasoning and significance to make such hay out of
> someone who renounced his US citizenship. It's not something that
> appeals to the vast majority of Americans who are incredibly patriotic
> and proud of our country. And for what? ...to make another few
> million when he's got billions?
>
> Another right wing, Misean-Friedmanite who left the cost and sacrifice
> of protecting our values and maintaining the leadership of the free
> world to others.

2008 Dec 02 01:36 PM

[biomedlives:]

If the point of the GIM chart is that the fund's price is down considerably this year, it's worth noting that including the dividends reduces the YTD loss to about 5% AND that the net asset value has risen YTD.

2008 Dec 02 10:02 PM

[Augustus:]

If my taxes only were used for "protecting our values and maintaining the leadership of the free world" that would be fine. Now I find that it will be used to keep some deadbeat living in a McMansion, continuing the employment of redundent government clerks, and bailing out overpriced union labor. It is almost reason enough to consider the "Templeton solution" while there is still an asset to take with me.


On Dec 02 09:51 AM VennData wrote:

> I question the reasoning and significance to make such hay out of
> someone who renounced his US citizenship. It's not something that
> appeals to the vast majority of Americans who are incredibly patriotic
> and proud of our country. And for what? ...to make another few million
> when he's got billions?
>
> Another right wing, Misean-Friedmanite who left the cost and sacrifice
> of protecting our values and maintaining the leadership of the free
> world to others.

2008 Dec 05 03:08 PM

[biomedlives:]

"...and bailing out overpriced union labor." If we object ot bailing out union labor, we should object even more strenuously to bailing out overpriced executives, some of whom are those wonderful folks who brought us subprime mortgages, mortgage-backed securities, and credit default swaps.

2008 Dec 05 07:49 PM